The market has done quite well in 2012 despite many challenges, having gained close to +13% since the start of the year. But most investors didn't enjoy such returns in their portfolios and many lost money. Why is that?
The simple answer is that they were in the wrong stocks. But the reality is that most investors typically invest without a clear roadmap. It is very easy to make gains when the rising tide lifts all boats. But navigating an uncertain environment, like 2012, without a plan of action is doomed to fail.
The New Year is not without its share of issues. But as I explained in my outlook for 2013 last week, there is a way to come ahead. And this is exactly the time to make those decisions that can put your portfolio on a sound footing for the year ahead.
This May Not Be For You
If you have a consistent stock selection system that helped you come ahead of the market in 2012, then you probably don't need our advice. Feel free to stop reading at this stage.
With the rest of you, I would like to share the investment process that we rely on here at Zacks, which makes use of 6 different factors to build a winning portfolio. Each one of these factors individually will help you pick good stocks. But putting all of them together gives you a significant edge over others in stock market investing.
More . . .
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This process lies at the heart of our Zacks Top 10 Stocks for 2013 service, which is about to be made available. This stock selection process is called the Zacks Method for Investing.
A random selection of good stocks, devoid of an overarching outlook for the market, will not give you the desired results. The portfolio is essentially the execution of your outlook for the market. For the Top 10 Stocks for 2013, we started with the market outlook that I shared with you last week and then used these factors to build the portfolio.
The 6 Elements of the Zacks Method for Investing
1) Valuation - There is plenty of empirical evidence showing that stocks with low valuations will outperform the market over the long haul. Therefore, we prefer companies that are trading with low Price-to-Earnings (P/E) and Price-to-Book (P/B) multiples relative to their peers and their own history.
2) Management Effectiveness - It is very important to get a sense for how effective the company's management is in utilizing the resources available to them. This can be done a number of different ways, but our research shows that Return on Equity [ROE] does a good job of capturing this attribute. So we seek out companies generating ROEs that are superior to their industry peers.
3) Recent Analyst Upgrades - Our research also clearly shows that stocks with a recent recommendation upgrade from brokerage analysts will continue to outpace the market. Most of that benefit is felt in the short run. However, quite often a stock that receives one upgrade is likely to get more in the future, which keeps pushing the stock higher.
4) Best Industries - Even the best looking stock will underperform the market if it's in an out-of-favor industry. That is why we overweight stocks from the best industries and sectors. And there is no better guide to choosing the right groups than the Zacks Industry Rank, which focuses on the earnings estimate revisions for all the stocks in the industry.
5) Long-Term Attractiveness - We look for stocks with a Zacks Recommendation of 'Neutral' or better that enjoy catalysts for outperformance. Our preferred long-term indicator is an 'Outperform' rating, but we consider neutral-rated stocks that stand to get upgraded to our preferred rating. The main ingredient behind the Zacks Recommendation is positive changes in a company's earnings estimates.
6) Timeliness - There is no better timeliness indicator than the Zacks Rank, which has produced annual returns of +26% since 1986 for Zacks #1 Rank (Strong Buy) stocks. We look for #1 and Zacks #2 Rank (Buy) stocks, but will consider Zacks #3 Rank (Hold) stocks if they show the potential for upgrade. These signals tell us that now is a good time to get into the stock. Just like the Zacks Recommendation, it focuses on stocks with the best earnings estimates.
Zacks has long been known for harnessing the power of earnings estimate revisions to foretell stock prices. So it's no surprise that half of the six factors make use of this powerful driver.
How to Find This Information?
The first three of these elements are free and widely available from Zacks.com and other investment websites. If you just concentrated on these elements you would be much better off than you are now.
The last three elements are proprietary to Zacks Investment Research and only available through our premium subscription services. Adding these three elements to the free ones above will put an almost unfair advantage in your hands.
The best way to tap into all 6 elements right now is through our Zacks Top 10 Stocks for 2013 report. These stocks have been hand selected to outperform the market this year. We are sticking with the change we implemented to the 2012 portfolio that gave us the ability to tactically respond to adverse changes during the year. We continue to believe that the 'buy-and-hold' investment approach doesn't mean 'buy-and forget'. We were quite successful in 2012 with the Top 10 portfolio up +29.3% vs. 11.1% for the S&P 500 through the end of November, and we remain confident of coming out ahead again this year.
Get In On the Ground Floor
After all, the sooner you invest in Zacks' Top 10 Stocks for 2013 portfolio, the more you figure to gain. Plus, you will be well positioned to withstand any market uncertainty with fewer worries in the year ahead. Be among the first to take advantage of these best-of-the-best stocks before they're released.
Look into Zacks' Top 10 Stocks for 2013 now.
Thanks and prosperous trading,
Sheraz Mian is the Director of Research. He determines which valuable data to use to assess winning stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and is also the editor of Zacks Top 10 for 2013 report.